Drought a further ‘disruption’ to Australia’s wheat market share in South-East Asia

Drought has proven to be an added ‘disruptor’ to Australia’s wheat export market share in South-East Asia, which is already under pressure from rising competition from lower-cost suppliers, according to South-East Asian grains expert Oscar Tjakra.

Visiting from Singapore to give first-hand insight into Australia’s most important wheat markets, Mr Tjakra, who is research analyst with Rabobank’s Asian operations, says, while South-East Asia poses strong growth prospects for wheat demand, it is firmly in the sights of competitor Black Sea (Russia, Ukraine and Kazakhstan) wheat exporters who have ramped up their export programs to the region. While, more recently, Argentina, has also been targeting exports into South-East Asia.

And the drought in eastern Australia, he says, has seen others step up to fill in Australia’s supply deficit.

“For example, Indonesia, which usually takes around four to five million tonnes of Australia’s wheat, has booked in a large wheat shipment from Argentina of about one million tonnes for delivery in the first half of 2019,” he says, “which will be their largest volume on record for this period.”

While Argentina has exported into South-East Asia “on and off over the years”, Mr Tjakra warns this shipment paves the way for it to potentially gain market share in the future.

“However the Black Sea region poses as the biggest threat to Australia’s market share in South-East Asia,” he says, “with Australia’s share of South-East Asian wheat imports falling from 50 per cent in 2011, to around 40 per cent in recent years. And this year it could drop to 30 to 35 per cent, with drought-reduced volumes.”

However, Mr Tjakra – who has been meeting with farmers throughout Australia’s major grain-growing areas, including the Western Australian wheatbelt and New South Wales’ Riverina – says, there are strong growth opportunities for Australian feed wheat, and potentially feed barley and sorghum, in light of the recent trade agreement with Indonesia. Wheat usage in food in the region is also expected to rise, with the Indochina region of Myanmar, Cambodia, and Laos holding particularly strong prospects.

Demand prospects

Wheat demand in South-East Asia is expected to be strong, Mr Tjakra says, forecast to rise by three per cent per year – to represent an increase of four million tonnes by 2023.

Driving this demand is the young demographic (with half of the population in the region expected to be aged 29 and below by 2025) and the increase in household food expenditure as out-of-home consumption rises and consumers increasingly crave convenience.

“This is a region that is already home to 650 million people, with a combined GDP of USD 2.8 trillion,” he says. “And it is on track to become the fourth-largest economy in the world by 2030 after the US, China and EU,” he says.

“As incomes rise, packaged and processed foods start to replace some of the basic food products and this is driving the rise in demand for biscuits, cakes, bread and pastries.” And it is this category which is expected to exhibit the strongest growth, he says.

“Meanwhile, noodles – which have traditionally been made from Australian-grown wheat – are not expected to exhibit strong demand growth, as consumers instead look for more convenient food to snack on. Albeit, this market will continue to grow in absolute volume terms.”

“The signing of the trade deal with Indonesia, Australia’s largest wheat export market, will see Australia have a 500,000 tonnes per annum feed grain quota, which will increase by five per cent per annum to include wheat, barley and sorghum,” he says.

While the appetite is currently not there for barley and sorghum as a feed source in Indonesia, Mr Tjakra says he hopes the market can be developed. But the question, he says, is whether Australian farmers want to grow feed grains as “they want to get the best price for what they plant in the ground”.

Increasing competition

Mr Tjakra says the drought in eastern Australia is driving a “big price gap between Australian wheat and its competitors”. But that competition from alternative suppliers into South-East Asia has been rising in recent years, as other origins boast a lower cost of production.

“For example, in 2018 the average wheat landed cost – which includes FOB and the freight cost – for the Black Sea region into South East Asia was around $235USD/tonne, compared to Australia’s $250USD/tonne,” he said, “with Australia’s supply chain costs, in particular, higher than their competitors.”

Mr Tjakra says the other factor at play is the overcapacity in wheat mills across South- East Asia.

“Wheat millers in the five major South-East Asian countries – Indonesia, Malaysia, Thailand, Vietnam and the Philippines – are under-utilised by around 50 per cent, which results in tight milling margins,” he says.

“To overcome the tight milling margins situation, millers try to reduce their cost of production by blending wheat from different origins to get the mix of flour they want. For example, they can buy Black Sea wheat and blend it with Canadian wheat.”

This helps in an environment where mills are also very price sensitive, he says.

“South-East Asia still has a lot of people on low incomes that really care if there is a five per cent increase in the price of wheat flour, which makes it very hard for the mills to pass on to the customer,” he says.

Implications for Australia

Mr Tjakra says while the backdrop for wheat demand growth in South-East Asia is positive, there are challenges for the Australian sector supplying to the region.

“The Australian industry is really at a crossroads, as to whether it increases its quantity – by increasing yields, including increasing the supply of feed wheat – or maintains its value proposition as a high quality producer,” he says.

“To do this, intelligence needs to be gathered around the characteristics of Australian wheat that are either highly valued or that are required by a different users, and this needs to be communicated between growers and the market.”

Maintaining competitiveness at a farm-level is also crucial, he says, aided by improving efficiency throughout the supply chain.

Mr Tjakra, who is responsible for covering grains and oilseeds for Rabobank in South- East Asia, was previously senior vice president of freight research with Oldendorff Carriers Singapore, where he led supply and demand research into global grains and oilseeds.

Rabobank Australia & New Zealand Group is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 38 countries, servicing the needs of approximately 8.4 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 94 branches throughout Australia and New Zealand.